Corporate Governance has become one of the most important factors in the organization for taking competitive advantage and also improving the economy of the nation (Mohamad, n.d.). A good corporate governance helps the organization to improve their brand reputation and also improve their organizational performance that becomes more beneficiary to stakeholders, shareholders, customers and suppliers of the organization. However, a poor corporate governance, have a negative impact on the financial performance and also reputation of the organization. Organizations that effectively follow the legislative norms properly, remain out of ethical issues and thus, execute better performance(Christensen, Kent and Stewart, 2010).
This report highlights the corporate issues faced by HIH Insurance, a public listed company in Australia. Due to this issue, the organization’s performance has been criticized publically. This paper investigates lack of proper corporate governance policies and procedures had led to the demise of HIH Insurance.
HIH Insurance was founded by Ray Williams in the year 1968, later on in the year 1971,it was acquired by the British organization named CE Health PLC. HIH was an Australian based public listed organization. Before, 2001, it was ranked as the second largest organization in Australian general insurance sector and covered various areas like the private or public liability, worker’s compensation, commercial or industrial insurance. However, on 15th March 2001, put into temporary liquidation. It had an aggregate loss of about $A5.3 billion as the consequences of over-optimistic asset valuation and high under-estimation of its liabilities, which resulted into the greatest corporate fall in history of Australian (Hih.com.au, 2013).
The term “corporate governance” can be defined as the obligation and rights structures between the stakeholders in the association (Aoki, 2001). Viable corporate governance is the component to verify that the employees of the organization compliments the privileges of the partners of the organization furthermore verify that the partners are acting dutifully concerning distribution, generation and assurance of the wealth of the organization. Poor corporate governance can lead to high dangers, unpredictability and low rate of return furthermore degenerate practices. According to Brown and Caylor (2004) organizations with weak corporate enactment to be less secure than organizations with stronger corporate impact. The purpose behind such poor corporate impact is indiscreet corporate influential practices that have tremendous cost on the reputation of the organization financers, buyers and different partners in this way raising the cost of capital and hurting other stakeholders of the organization (Tricker, 2009).
Financial Reporting: Financial reporting along with good corporate governance is a key drive towards development of the economy. Thus, a proper financial reporting system should give all the necessary information about the organization and its financial performance to its stakeholders and shareholders. This system should always be reliable, free from predisposition and ought to empower correlation on the premise proper standard benchmarks (Tricker, 2012). An organization's financial reporting give different monetary data that speculators and leasers utilization to assess an organization's financial execution. Financial explanations are additionally critical to an organization's supervisors in light of the fact that by distributed monetary articulations, administration can correspond with intrigued outside gatherings about its achievement running the organization. Therefore, it requires a suitable financial reporting framework that consolidates standards of accounting and reflects a healthy financial performance of the organization while guaranteeing lawfully enforceable responsibility.
Composition of Board: As defined through the framework of corporate governance, the board actually makes sure transparency, fairness and accountability to maintain proper relationship with the stakeholders. Therefore, the board plays a key role in the mechanism of corporate governance (Tricker, 2012). The board is in charge of guaranteeing that the enterprise has decently characterized and secured shareholder rights, a strong control environment, elevated amounts of straightforwardness and exposure, and keeps the diversions of the organization and those of all shareholders aligned1. The board is in charge of coordinating and controlling the matter of its organization and is responsible to shareholders for its execution.
According to the Code of Corporate Governance of UK, “a board and its committee should comprise of directors with the fitting parity of aptitudes, experience, autonomy and learning of the organization to empower it to release its obligations and obligations successfully” (out-law.com, 2010). A board that comprises of executives with a various set of utilitarian ability (promoting, designing, money, and so forth.) industry experiences, instructive capabilities, ethnic and sex blend may be better outfitted to manage a wide scope of issues confronting the firm and furnish officials with counsel and discussion from numerous points of view
Committee Composition: The committee of corporate governance mainly comprises of compensation committee and audit committee. They also play a vital role like directors in corporate governance. They mainly emphasize on supervising matters of corporate administration for the board, including forming and prescribing administration standards and arrangements (out-law.com, 2010). As its name infers, this panel is accused of upgrading the nature of chosen people to the board and guaranteeing the honesty of the choosing methodology. Further, their part is to screen the honesty of the organization's monetary articulations and declarations; to audit interior budgetary controls and (unless there is a different danger panel) hazard administration frameworks; to screen and audit the inner review capacity; to prescribe the arrangement or substitution of outside examiners and to survey the adequacy of their work; to create and execute approach on the utilization of the examiners for non-review administrations.
Remuneration: Executives' compensation is of authentic concern to the shareholders. They are qualified for expect that compensation will be 'sufficient to pull in and hold the executives expected to run the organization effectively'; and that 'the compensation of official executives ought to connection rewards to corporate and individual execution'. Hence, the remuneration advisory group ought to be specifically in charge of the pay of chiefs. This will give the advisory group a more prominent control more than an organization's pay rehearses. Moreover, the compensation advisory group ought to have oversight of compensation arrangement all through the business; however it will just set pay bundles for the most senior staff (Rogers, n.d.).
According to the annual report of HIH, 2000, before the collapse, the organization had net assets of $900 million, total assets of $8.0billion, overall liabilities of $7.1billion and gross premium revenue of $2.8million. The main reason behind the collapse of HHI in the year 2001 was aggressive management style, running behind new businesses and also biasness towards the investment market (Cheng and Seeger, 2012). Further inconvenience emerged from distribution being over-dependent on broker business that was quite sensitive in nature. Issues related to cash flows also added to a tumble off in specialist business and troubles in offering auxiliaries to raise money.
Further, according to the report of Royal Commissioner, Justice Neville Owen, the group faced this collapse due to inadequate saves against future cases. There was an absence of due process, an absence of breaking points on power, an absence of autonomous basic examination, an absence of management of irreconcilable situation, and an absence of information to the board and appropriate accounting policies and procedures. Additionally, the organization dealt with consistent divulgence, including the independence of the auditor, presentation of individual obligation for breach; standards of accounting; expensing of alternatives; compliance controls; and support of more prominent shareholder investment at different meetings. He also identified that the middle managers had made strides that brought about the distortion of the organization's records or returns held up with statutory powers. In a few cases, he watched, the current law did not achieve the moderate behaviour.
Based on the above discussion, the HHI issues will be further detailed based on four areas discussed above, financial reporting, board structure, committee composition and remuneration.
Financial Reporting: The financial report of HHI did not involve an evaluation of a substance's capacity to proceed to work as a going concern. The firm likewise neglected to manage various accounting irregularities. As per Royal Commission, it neglected to represent future pay tax reductions, conceded procurement costs, conceded data innovation expenses and goodwill. As indicated by his supposition, reviewer neglected to get sufficient proper confirmation under AUS 502 and should have issued a qualified sentiment (The Sydney Morning Herald, 2005). The official additionally watched issues of translation of accounting norms, selection of global accounting guidelines from 1 January 2005, and the requirement for the Australian Accounting Standards Board and its Urgent Issues Group to be better ready to give opportune exhortation on troublesome translation issues. Overall these issues was that consistence with accounting norms, while a necessity of the Corporations Act, did not associate with the privileged obligation under the Act for the records to give a genuine and reasonable perspective (seiofbluemountain.com, 2010).
Board Structure: The HIH Board structure mainly included two founders one is Ray William an later on after his resignation; Rodney Adler was on the board. Ray William resigned from his managing director position on December 2000, just before the collapse, with severance agreement of worth $A5 million. However, both the board members were equally responsible for this financial catastrophe faced by the organization. Both the board members followed some unethical practices that ruined the organization. Due to their illegal and unethical behaviour, HIH had to face such a crisis. This implied that HIH had bungled its key business operations. The collapse specifically had negatively impacted on the stakeholders who needed insurance from unforeseen cataclysms however rather were cleared out with useless protection. After proper investigation by the Royal commission it was reported that Ray Williams pleaded for three different criminal charges (Alberici, 2004):
Also, in the year 2005, April, it was reported that executive Rodney Adler was sentenced for 4.5 years penitentiary for three criminal accusations, which included (Blackman, 2013):
Committee Composition: The HIH committee mainly included three members in the Audit committee, Arthur Andersen as directors and two non-executives Justin Gardiner and Geoffrey Cohen and a finance director, Dominic Foder. Their main roles and responsibility was to keep keen observation on the financial performance of the organization in an ethical way. However, due their mismanagement, the organization had to see a huge loss. The lack of professional scepticism in these committee members has caused a huge loss to HIH (Watts, 2002). For Instance, before securing expenses brought about in getting and recording strategies of protection can be conceded and perceived as resources, they must be equipped for dependable estimation and must probably offer climb to premium income in consequent money related years. For this situation, Andersen did not work as for the recoverability of conceded obtaining expenses, depending rather, 'as an issue of expert judgment', upon HIH's recorded benefit, making lacking proof (ALLAN, 2006). Further, Dominic Fodera also was charged with 6 different criminal offences, which was however not disclosed related to this HIH Collapse. However, one of the spokewoman later on said that Fodera was due to four counts for misleading Section 1309(1) of the Corporations Act and two counts for dishonestly following the Section 232(2) of the Corporations Act (The Sydney Morning Herald, 2005).
Remuneration: The governance of HIH is clearly taking into account stewardship for senior officials in light of the way that they are fit for moving cash to records of their picking. There was no proper disclosure of the remuneration given to the higher executives in HIH. This shows that there was lack of transparency with regards to the remuneration of directors also there is no such information related to the remuneration committee. The organization lacked in making proper remuneration committee that could have helped to have strong control on the directors’ action (Rogers, n.d.).
The main principle of corporate governance is to support the efficiency and transparency of the business sector and to bolster the principle of law. Specifically, they are concerned with the definition and implementation of shareholder rights and the managers’ role, therefore harmonising organization’s interests with the investors and also its surroundings. The below mentioned recommendations can help HHI to harness such good governance environment:• HHI ought to create and reveal the separate parts and obligations of board and administration.
a. Create the capacities held to the board and those appointed to senior officials and unveil those capacities
b. Unveil the procedure for assessing the execution of senior administrators
• HHI should have a leading body of a successful creation, size and duty to enough release its obligations and obligations.
a. A larger part of the board ought to be autonomous chiefs.
b. The CEO’s and chairman’s role ought not be practiced by the same single person
c. The board ought to make a designation council.
• HHI should create a set of accepted rules and uncover the code
a. Create an policy concerning differing qualities and uncover the policy or a synopsis of that strategy. The approach ought to incorporate necessities for the board to create measurable destinations for accomplishing sex assorted qualities for the board to evaluate every year both the goals and advance in attaining to them
• HHI should have a structure to freely confirm and shield the uprightness of their financial reporting
• HHI should advance auspicious and adjusted divulgence of all material matters concerning the organization
a. Making a written policy can maintain compliance
• HHI should regard the privileges of shareholders and encourage the powerful practice of those rights
a. Outline a communications policy for effective correspondence with shareholders and empowering their investment at general gatherings and reveal their strategy or a rundown of that approach.
• HHI should secure a sound arrangement of risk oversight and administration and inward control
a. The board ought to oblige administration to outline and execute the danger administration and inward control framework to deal with the organization's material business risks and report to it on whether those risks are being overseen viably. The board ought to unveil that administration has answered to it as to the viability of the organization's administration of its material business risks.
• HHI should guarantee that the level and creation of compensation is sufficient and sensible also that its relationship to execution is clear.
This report discusses the governance issues faced by HHI and how it has affected the performance of the organization. From, this report, it is clear that corporate governance should be enclosed under proper ethical standards, as the corporate world and the consumers are more concerned about the ethics code and practices. Following proper business ethics helps every organization to build up good relation with shareholders and the stakeholders. This report highlights the governance issue of HHI in four different areas, financial reporting, board structure, committee composition and remuneration. Analysing these four areas helps to understand the importance of these factors in corporate governance. Before concluding this report, the author gives some recommendations to improve the corporate governance practice that can help HHI to overcome this issue.
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Brown, L. and Caylor, M. (2004). The Correlation between Corporate Governance and Company Performance. [online] solvay.edu. Available at: https://www.solvay.edu/EN/Programmes/Visiting%20professors/ docs/Brown_Firm_Performance.pdf [Accessed 12 Mar. 2015].
Cheng, S. and Seeger, M. (2012). Lessons Learned from Organizational Crisis: Business Ethics and Corporate Communication. IJBM, 7(12).
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out-law.com, (2010). Composition and structure of the board â€“ the UK Corporate Governance Code. [online] Available at: https://www.out-law.com/page-8216 [Accessed 12 Mar. 2015].
out-law.com, (2010). The audit committee â€“ the UK Corporate Governance Code. [online] Available at: https://www.out-law.com/page-8219 [Accessed 12 Mar. 2015].
Rogers, P. (n.d.). ETHICAL OBLIGATIONS AND THE MANAGER: CASE STUDIES. [online] thomsonreuters.com.au. Available at: https://www.thomsonreuters.com.au/product/AU/files/720502412/chapter_13.2_case_studies.pdf [Accessed 11 Mar. 2015].
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The Sydney Morning Herald, (2005). Former HIH exec Fodera in court. [online] Available at: https://www.smh.com.au/news/National/Former-HIH-exec-Fodera-in-court/2005/10/25/1130006110185.html [Accessed 11 Mar. 2015].
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